Using ROI to Buy a Franchise

One franchise broker says using a simple return on investment calculation is helpful in determining yes or no in buying a franchise. Franchoice's CEO Jeff Elgin advises franchise buyers that the following method determines if there is a reasonable return on capital outlay:

Based on your research, you determine that the total monetary investment in the franchise is going to be $200,000. You further determine that the average income (before any owner compensation) produced by this type of franchise in the third year is $150,000. From the expected income of $150,000, you subtract $60,000, which represents the fair market compensation for your time. This leaves you with $90,000 as a return on the investment of both your money and your time. You would expect to earn at least $30,000 per year as a fair return on the $200,000 of invested capital, so the franchise in this example provides an additional $60,000 as a return on your invested time. That equates to a 100 percent return on the investment of your time. Even if there are no soft benefits to you whatsoever, this sounds like a pretty good deal.

If, on the other hand, the typical third year gross income is only $90,000 instead of $150,000, you would clear the same return on the capital you invested but the ROI on your time investment would be zero. With an ROI like that, the obvious question is why take the risk? Unless there are compelling soft benefits for you, it would be better to keep looking for a different business with higher returns while you stay in your current job. - Entrepreneur